Better define asset categories and cut alpha - New Morningstar core and core plus bonds

Morningstar changed the definition of core bonds last month by breaking the category into two, core and core plus. The core definition is an intermediate bond fund that includes government, corporates, securitized debt, and less than 5 percent in other categories. The core plus category includes high yield, bank loans, emerging markets, and non-US bonds. Clearly, the old definition allowed for a significant amount of gaming through taking on more risk is assets not usually included in investment grade bond benchmarks. 

Alpha was created by loading up on the things that were not in the benchmark and including more assets that are not usually expected in core bond investment. Hence, there may have been significant hidden risks in these funds. The new categories change the Morningstar rating for many well-rated funds since they are now in a new peer group. A graph of the difference between core and core plus over different horizons shows that the average excess return for core plus is positive. This would have given these funds a ranking advantage in the old broader category. 

These more detailed or restrictive definitions are good for investors, regardless of what you think of Morningstar ratings, but it again focuses attention on what alpha means. Is alpha skill the ability to choose assets not in a benchmark that may have higher risk? This portfolio composition is a skill, but most think of alpha as the ability to choose weights based on timing of excess return and not by overweighting non-benchmark assets.  Better definition leads to an incredible shrinking alpha.